Tuesday, October 21, 2014

European Unicorns (or not!) @ TC Disrupt London

Exciting couple of days at TC Disrupt London: I had the chance of starting my Monday morning with an interview at Bloomberg TV "On The Move" with Jonathan Ferro and my Tuesday Morning with a panel at the conference led by Ryan Lawler.

Both discussions addressed the theme of European Unicorns  - ie can Europe produce large venture outcomes. A few years ago, the potential was real. Today, it has been realised as Europe has demonstrated its ability to generate multi-billion outcomes with companies like Supercell ($3B), Qlik ($2.5B), Criteo ($2B), Just Eat ($2.4B), King ($3.6B), Zoopla ($1B), Waze ($1B) among others...The questions is now turning into whether Europe can create $20B+ outcomes. Time will tell but all pointers are in the right directions. Unicorn are not supposed to exist but we are seeing a lot of them in Europe these days with the maturation of the European tech ecosystem. May be we should stop calling them Unicorns!

Tuesday, June 17, 2014

Sharing economy: it is not about cost but value

Short interview on Bloomberg by Caroline Hyde on the sharing economy and the London ecosystem during the London Tech Week. It was fun!

Here is a quick summary of my discussion on the sharing economy and wider changes in the European technology scene.
Sharing economy is not about cost but value
Accel has made a few investments into sharing economy businesses. More than simply offering customers a chance to save on cost, the sharing economy revolves around the value of innovation – marketplace services change people’s way of living by granting them access to a new service. For example, BlaBlaCar, the long-distance ride-sharing network, connects drivers with paying passengers, and is now carrying more people per month than the Eurostar for much less investment. Another example, Vinted, the social marketplace for second-hand clothes, allows users to chat about fashion and swap clothes on their mobiles, and is seeing more than one item listed each second 24/7.
Europe is a collection of tech hubs...hard to know where the next big things is coming to come from
Having worked in Silicon Valley, I can say that, while both the US and Europe are full of innovation, the European tech scene is much more fragmented, as it is spread across a collection of hubs, including London, Paris, Tel Aviv, Berlin, Moscow and the Nordic countries. As a result, you never know where the next big innovation will come from. We’ve backed Funding Circle and Mind Candy in London, BlaBlaCar and Vente-Privee in Paris, Supercell in Helsinki and Avito in Moscow.
The flourishing of these hubs has been a really big development for the region. When Accel first came to Europe 15 years ago, most of our investments were concentrated in the UK and Israel. Now we invest across these hubs. As they grow in number and size, it is beneficial for each individual hub, too, as their businesses can leverage them to extend their network and expand across Europe and around the world.
Another important regional development is the number of billion-dollar-plus exits over the last few years, such as Supercell’s partial sale to Softbank, which have been really additive to the ecosystem. We have companies like Spotify and Rovio in the pipeline as well, so there are plenty more exciting things to come.  Europe has reached a truly interesting time for innovation and we are excited to see what’s next.

Tuesday, April 15, 2014

The next frontier of digital services

Six secular trends will shape the future of ecommerce in the coming decade: mobile becoming a dominant channel, emergence of one click services, rise of the sharing economy, deep personalization, instant delivery and Asia becoming a major market.

I remember when the first ecommerce sites launched in the late 90’s with poor dial up connectivity and everyone thinking that a few years down the road everything would be bought online. Fifteen years later, ecommerce has gone a long way and changed our way of life, representing a $1.3T market globally. However, ecommerce represents only 8-12% of total retail sales and there is still a lot of room to grow from here. The fact that companies like Amazon or eBay are still growing at 20-30% annually despite their massive scale illustrates this untapped potential. Looking forward, we are seeing 6 trends that will fuel this growth and shape the future of online commerce:

Mobile supremacy: coming as no surprise, the main trend that is changing ecommerce today is the relentless growth of mobile. Mobile represents 15% of internet traffic, growing at 150% per year but users spend 87% of their time on mobile on applications (vs. mobile internet), so this underestimates the actual penetration. In addition, consumers are spending a lot of time searching for information that they use to buy in retail stores and mobile is a very powerful tool for this use case. The level of engagement on mobile is changing the game of online commerce and already on the path to becoming the dominant channel: Etsy is seeing close to half of traffic and 30% of GMV on mobile. Showroomprive is experiencing similar numbers. Supercell reached 10m mobile users in less than 4 months (it took 27 months for Facebook). HotelTonight is selling last minute hotel rooms exclusively on mobile with more than 6.5m users, growing 300% year over year and the list goes on…

One click services: have you tried to find a cleaner for your home or a sitter for your dog? Today, the process is cumbersome, including multiple phone calls, quotes, sometimes onsite visits…Tomorrow, you will be able to go online and book the service at a convenient time in just one click. Companies like Homejoy, Handybook, Dogvacay or Rover.com are already making this future a reality in the US and we should expect to see these services developing in Europe soon.

The rise of the sharing economy: when Rachel Botsman published “Collaborative consumption” in 2011, many peer to peer services were emerging but eventually many of them did not reach scale as the friction to deliver the service or product often offset the value received. However,  peer to peer had proven to work and is getting massive scale in several areas: home sharing with Airbnb (10m “guest stays” since launch) and Housetrip, ride sharing with Blablacar (close to 7m members in 10 countries), fashion with Vinted (14m listings) and lending with Lending Club and Funding Circle. Peer to peer marketplaces are here to stay and redefining several areas of online commerce.

Personalize or die: the day of a “one size fits all” for ecommerce are counted. The development of new business intelligence platforms is now making the analysis of large amount of data possible in real time and this intelligence can be used effectively to personalize user experience. Criteo pioneered this field with ad retargeting and we are now seeing a new breed of companies like Monetate or Sailthru pushing personalization further to content, search and email.

Instant delivery: ecommerce has reduced delivery time from a week to next day but to continue eating into retail sales, the limit needs to be pushed further down while keeping shipping price low. Tough challenge that is hard to overcome with traditional courier services but technology is here to help and new services are emerging even though it is very early days. Companies like Uber are floating the idea of using their car fleet to deliver goods, Amazon is experimenting with drones and Netflix is making fun
of it (this may not happen in the near future!) and online/ mobile delivery services like Postmates are starting to grow in the US. Who knows what the future holds but there is a lot of investments and creativity working on this problem.
Asian Tigers turning digital: In 2014, for the first time, consumers in Asia-Pacific will spend more on ecommerce purchases than those in North America, making it the largest regional ecommerce market in the world. China represents 60% of this market with companies like JD.com (212m orders and $14B GMV in the first 9 months of 2013), Alibaba ($160B sales in 2012) and IQiyi ($2.6B revenues in 2014) expected to go public in the US in 2014.  India is following with companies like Flipkart which grew its revenues 5x last year. The e-gold rush is happening in Far East!

Tuesday, January 14, 2014

CAC 2.0: How SaaS businesses can refine their customer acquisition costs

Happy new year 2014! It has been a while since my last blog post but with the new year comes new resolutions and a new design layout for Cracking-the-code. I hope you will enjoy the read

Simple CAC ratio
As many companies are finalizing their 2014 financial plan (feel free to use the Accel template), I thought it could be a good time to write a short post on the CAC ratio - a simple metric that I defined in a blog post in 2008 (time flies!) to measure the sales ramp; marketing productivity of Cloud businesses. This metric measures the ratio of the annualized additional recurring revenue generated by your sales and marketing investments. The simple formula is based on traditional GAAP financials, available for public companies. The target for this ratio should be close to 1 (1 year payback) but for companies with low churn (5 year+ lifetime) and growing fast, anything above 0.5 (2 year payback) warrants further investments.

CAC ratio = [GM (Q4 13)- GM(Q3 13)] x 4/ S&M costs (Q3 13)
(GM: Gross Margin; S&M: sales and marketing)

CAC ratio based on CMRR
While very easy to calculate and benchmark, this formula can be refined at different levels. Firstly, this formula assumes that the revenue recognition time starts one quarter after the actual sale (time to implement the solution and go live) - hence the allocation of Q3 and not Q4 S&M costs in the formula. This is a rough approximation. Secondly, the total revenue also includes, most of the time, non recurring revenue like implementation services or training which are independent of the sales productivity. To have a first level of refinement, it is best to include only the net new contracted recurring revenue in the given quarter or CMRR (see blog post on SaaS metrics). The resulting CAC ratio becomes:

CAC ratio = [Net New CMRR (Q4 13) x GM (%)] x 12/ S&M quarterly costs (Q4 13)

CAC and Renewal ratio separating New Sales and Renewals
The ratio can now compare accurately the new recurring business generated in Q4 2013 with the relevant sales and marketing costs incurred. This is the most standard CAC ratio for early stage SaaS businesses. However, as companies mature, the sales organization usually is broken down between the Hunters (new sales) and the Farmers (account management for renewals and upsells). Each team can be measured separately. While the CAC ratio will measure the effectiveness of the Hunting team, the Renewal ratio will measure the effectiveness of the renewal and upsells team. The challenge is to allocate the marketing spent towards one team vs. the other. I usually assumes that everything regarding lead generation goes to the hunters, while general marketing and branding is split 2/3 for Hunters and 1/3 for Farmers (one short cut is to assign 100% of marketing costs to the Hunters). The two metrics become:

CAC ratio = [Gross New CMRR generated by the Hunters  x GM] x 12/ S&M quarterly costs for the Hunters

Renewal ratio = [Net CMRR (renewals + upsells) from the Farmers x GM] x 12/ S&M quarterly costs for the Farmers

For the CAC ratio, the benchmark needs now to be closer to 1 (or more!) as the noise of the renewals and churn is now eliminated. For the renewal ratio, the benchmark that I use typically is around 5, meaning that it costs 20 cents to renew 1 dollar of recurring GM equivalent to a steady state (flat revenue) where the S&M costs represents around 20% of the recurring gross margin

CAC ratio taking into account sales force quota ramp-up
Finally, for fast growing companies that are hiring many new sales people every quarter, the CAC ratio can be further refined to take into account the sales ramp-up. Let's take an example: if you have 10 sales people active in a quarter with only 6 fully ramped up (100% quota) and 4 of them just starting with a quota of 25% of the full quota, your are only getting an effective team of 7 people (6x100% + 4x25%) = 7 but you will be paying for 10 people. To take into account this ramp-up effect, you can adjust your S&M costs in the formula accordingly and multiply them by 7/10 = 0.7 or 70%. In this case, your effective S&M costs = S&M costs x 70%. The adjusted CAC ratio becomes:

CAC ratio = [Gross New CMRR generated by the hunters  x GM] x 12/ [S&M quarterly costs for the hunters x avg. quota ramp-up (%)]

When using the ramp-up formula, the benchmark should now be 1.0 (1 year payback) given that all the noise has been removed. The same ramp-up factor could be calculated to refine the renewal ratio

So which number to pick? I think it depends on the stage of the company. The simple ratio based on GAAP revenue should be used primarily for benchmarking public companies as it is fairly inaccurate. For most early stage companies (up to $10m annual revenue), the CAC ratio based on CMRR should be the most important one, with the option of refining it with the quota ramp-up. Above $10-15m in annual revenues, it probably make sense to separate new sales from renewal, as both teams have different leaders which would benefit from being measured with different metrics


Finally, to close this post, here is something to make you feel better about your new year resolutions...or the lack of!